At the Margins

The 2021 Outpatient Proposed Rule: Our 3 key takeaways

by Stu Clark, Shay Pratt, and Lauren Robinson

Yesterday, CMS released the proposed rule for hospital outpatient departments (HOPDs) and ambulatory surgical centers (ASCs) for calendar year (CY) 2021. While our team continues to analyze the 785-page rule, there are several key items that health system and hospital leaders should know.

For a more in-depth discussion on the proposed rule, and potential impacts, we will be hosting a webinar on August 27th.

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In the meantime, find below our top three initial takeaways from the proposed rule.

1. Payment rate update

CMS' proposed rule would increase hospital outpatient payments by 2.6%. CMS estimates that total payments for providers will increase by $7.5 billion compared with CY 2020, for a total of $83.9 billion in CY 2021. The proposed update is a product of a strong market basket update of 3% for inpatient services and few downward adjustments outlined in the table below.

2. Proposed elimination of inpatient only list (IPO)

In last year's final rule analysis, we noted that CMS opened the door for outpatient procedural migration; the agency finalized all proposals to remove procedures from the inpatient only (IPO) list and expanded eligibility for select procedures to the ASC. This year, they took the door off the hinges and proposed the addition of eleven procedures to the ASC covered procedures list (CPL), including total hip arthroplasty (THA) and a complete elimination of the IPO list by 2024. Unsurprisingly, the first 266 services scheduled for CY 2021 removal are musculoskeletal-related.

  1. Our expert's take on orthopedics reimbursement

    With THA and total knee arthroplasty (TKA) having been removed from the IPO list over the past two years, the bulk of orthopedic services remaining on the IPO list are low in volume and less of a strategic priority. Coupled with a lack of financial incentive to move these cases outpatient, we expect a limited shift to the HOPD. Cervical fusion is the only major exception. Given the sizable preexisting commercial case body receiving outpatient cervical fusion, at approximately 47,000 estimated volumes in 2019 (MSP), it is clear these procedures can be performed in the outpatient setting.

    The difference between IP and OP cervical fusion reimbursement is significant at upwards of $7,000 per case. Providers have little incentive to shift Medicare cervical fusion cases to the HOPD. Therefore, we do not expect to see a rapid shift of cervical fusion cases to the HOPD following this rule update akin to that which we saw when TKA and THA were removed from the IPO list.  The low payment differential for TKA and THA (IP vs. HOPD) was an incentive for providers to build their outpatient capabilities.

    Especially of note in this year's proposed rule is the addition of THA to the ASC-CPL. With THA and TKA now both payable in the ASC, individual surgeons can take all of their joint replacement cases to the ASC setting. They are predisposed to do so given the financial stake many surgeons have in freestanding surgery centers. As a result, hospitals have to think about joint replacement site of care shifts holistically, and cannot count on these cases remaining at the hospital in the future.


  2. Our expert's take on the broader reimbursement implications

    The announcement to effectively phase out the IPO list across a three-year timeframe starting in 2021 has significant financial ramifications for health system finances if finalized. On one hand, this proposal isn't surprising as it represents a continuance of a broader trend in OP shift that has played out over the last decade. In fact, this could be one of a series of upcoming proposals designed to ensure CMS gets greater value for its health care dollar.

    However, the timing of such a change, along with the associated reimbursement implications, will be a tough pill for many health systems to swallow. The epidemic-related shocks have strained organizations' finances due to lost procedural volumes and increased costs. We hope to have more specific estimates on the financial implications of broad outpatient shifts in the near future. We're partnering with our data team to model out the assumption that all one-day stay procedures move to outpatient.

    Beyond the reimbursement reductions themselves, several other implications are worth considering: the likelihood of greater audit scrutiny downstream as "IPO" is no longer standard for certain procedures; increased administrative requirements for documentation to support inpatient level of care; the potential for further erosion of the cross subsidy if commercial payers or MA plans follow suit; and required adjustments and updates to billing systems. However, we have seen broad proposals like this before ultimately scaled back or significantly delayed, and much can change between now and the issuance of the Final Rule. I recommend all Advisory Board members register for our State of the Union web conference series for an in depth discussion about purchaser priorities.

3. Cost savings opportunities prioritized by curbing utilization and spending

340B eligible hospitals received a double-whammy of bad news from CMS yesterday, and the U.S. Court of Appeals in the District of Columbia last week.  In the 2021 proposed rule, CMS is looking to increase cuts to 340B reimbursed drugs from the current ASP -22.5%, to ASP -28.7% (ASP -34.7%, plus a 6% add-on of the products ASP).  Representing a decrease of $427 million, which will be redistributed through a budget neutral adjustment to the OPPS conversion factor.

And then late last week, the U.S. Court of Appeals in a 2-1 decision held that CMS has the authority to reduce payment rates for 340B drugs that are reimbursed under HOPPS, reversing an earlier district court ruling that found HHS had over-stepped its statutory authority with the current rate cuts (ASP -22.5%). This decision effectively preserves the existing cuts for the foreseeable future, whether the proposed increased cuts make it into the final rule or not. Hospital groups have indicated that they will appeal the court's ruling.

CMS has prioritized price differentials as a mechanism to control outpatient spending. Last year, it finalized a new mechanism: prior authorization for five cosmetic procedures. This year, they expanded prior authorization requirements for two additional services: cervical fusion with disc removal and implanted spinal neurostimulators to curb unnecessary utilization. CMS estimates annual Medicare savings of $31,844,388. If Medicare's prior authorization policy is successful, we anticipate that regulators will continue to expand the policy to other services.

Additional changes to note:

  • Device pass through payment applications, two out of five approved;
  • Changes to the level of supervision for non-surgical extended duration therapeutic services, cardiac rehab, and pulmonary rehab in hospitals and critical access hospitals;
  • More changes to the overall hospital quality star rating methodology;
  • Hospital OQR and ASCQR Programs, requirements to be refined to limit compliance burden (not proposing any additions or removals for either program); and
  • Creation of two new C-APCs, for a total of 69 C-APCs.

Reminder: This is still a proposed rule

As always, this is not yet finalized, and a wide range of outcomes is possible when the final rule arrives this fall. Advisory Board will continue to provide additional commentary and analysis as we read through the proposed rule.

The comment period for providers to submit feedback on this proposed rule is set to close on October 5th. To submit your comments directly to CMS, please visit: https://www.regulations.gov.

Cheat sheets: Medicare payment 101

Feeling overwhelmed by all of the new proposed rules CMS has released? Get back to basics by viewing our cheat sheets which provide an overview of different payment programs, who they affect, when they're updated and what goes into payment calculations.

Download our one-page cheat sheets for a quick overview of each rule's scope:

Access the Cheat Sheets